Local Harris Teeter stores to stay open once Kroger deal complete

FTC must still approve proposed $2.4B purchase

The five Nashville-area Harris Teeter grocery stores might see some changes in the coming months but will remain open once Kroger’s $2.44 billion purchase of its rival is finalized.

Kroger's top finance executive on Tuesday said the company will maintain the Harris Teeter brand and has no immediate plans to close any stores. However, it is not yet clear if the Cincinnati-based grocery giant will tweak Harris Teeter's product offering, perhaps by taking the product lines in an upscale direction a la Whole Foods and Fresh Market. North Carolina-based Harris Teeter has higher margins than Kroger in large part due to a greater emphasis on fresh produce.

“We’re making plans as to how we will operate in these markets in the long term,” Mike Schlotman, Kroger's CFO, said during a conference call with analysts and investors.

Schlotman said Kroger plans to tap into Harris Teeter’s expertise regarding the operation of urban stores. In Nashville, for example, Harris Teeter operates two groceries in urban-sited buildings at 21st Avenue South and Blair Boulevard and in Belle Meade across from Saint Thomas Hospital. In contrast, Kroger’s Nashville stores — including those near the urban core — are housed in suburban-oriented big boxes severed from the street by surface parking lots.

Also in the Nashville market, Harris Teeter operates two stores (the previously mentioned Belle Meade location and a site on Franklin Road in Brentwood) within close proximity of Kroger stores. Kroger officials did not say Monday how the company expects the symbiotic relationship to play out at those groceries or others in similar locations.

Schlotman said he does not feel that in the few markets where the companies' store networks overlap — in addition to Nashville, he mentioned Raleigh, N.C., as well as two cities in Virginia — the company’s combined market share would be “dramatic.” However, he added that the Federal Trade Commission, which must still approve the pending deal, will sometimes look at smaller market areas within cities when scrutinizing deals for signs of anticompetitive effects.

Dr. Andy Borchers, a professor at the Lipscomb University College of Business, said possible changes for the local Harris Teeters could be forthcoming.

“Kroger does do a fair amount of manufacturing,” Borchers said. “For example, the company has a dairy in Smyrna and might leverage its manufacturing ability. Locally, you may find that Kroger switches the dairy source for the Harris Teeters.”

Borchers, pictured on the right, said Kroger will face the challenge of working with the two companies’ workforces — both with management and rank-and-file workers.

“They have to figure out how they will combine the cultures,” he said.

Borchers said Kroger can capitalize on Harris Teeter’s various upscale offerings, including deli items, high-end flowers and packaged specialty foods.

“The human knowledge [Kroger has gained in the transaction] might be worth more than the additional locations,” he said.

Borchers said Kroger likely figures it can increase its local market share by being able to focus on customers interested in higher-end products at Harris Teeter and those focused on less-costly products at Kroger.

“In this case, they are going higher priced [with the acquisition],” he said. “Kroger is looking at customers at different price points but also with different shopping needs.”

Dr. Achintya Ray, an associate professor of economics and finance at the Tennessee State University College of Business, said the looming transaction raises many questions. He said, for example, Publix could still make a play to purchase Harris Teeter, even though Kroger's purchase contract does not allow Harris Teeter's board to shop the company.

On a local level, Ray (pictured above on the left) said Kroger will attempt to harness the strength of both brands but will face the challenge of melding some differences.

“Both are highly recognizable and have loyal customers [in this market],” he said. “However, they are very different grocery companies. There is a difference in the diversity of products. Kroger offers more diversity. And the financial structures of both are very different. For example, Kroger is highly leveraged. It’s a very complex situation.”

The average Kroger store size nationwide is 61,000 square feet, while the average size of a Harris Teeter is 49,000 square feet. However, the average square footage of Harris Teeters that opened in 2012 is about 54,000. Kroger's 2012 revenues almost reached $97 billion while Harris Teeter's came in at $4.5 billion.

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